INSUBCONTINENT EXCLUSIVE:
DigitalOcean, a cloud infrastructure provider targeting smaller business and younger companies, announced today that it has secured $100
million in new debt from a group of investors, bringing its 2016-era debt raise to a total of around $300 million
The company nearly $200 million debt raise in 2016 was preceded by an $83 million Series B in 2015.
TechCrunch spoke with DigitalOcean CEO
Yancey Spruill (hired in 2019, along with a new, IPO-experienced CFO; the company added a new CMO earlier this year) to get under the skin
of the new funding, and better understand the company revenue scale, its financial health and its future IPO plans.
The firm intends to use
the new funds to invest in partnerships, boost product investment and grow what its CEO called an &early-stage& inside sales capacity.
For
readers of our regular $100 million ARR club series, consider this something of a sister post
We&ll induct DigitalOcean later on
Today, let focus on the company momentum, and its choice of selecting debt over equity-derived fundraising.
Contextual growth
DigitalOcean
is a large private company in revenue terms, with the former startup reporting an annualized run rate of $200 million in 2018 and $250
million toward the end of 2019
According to Spruill, all the company revenue is recurring, so we can treat those figures as effective annual recurring revenue (ARR)
results.
Sticking to the financial realm, DigitalOcean told TechCrunch that it has a mid-20s percentage growth rate, and the company claims
that its EBITDA (an adjusted profit metric) are in the low 20s
Citing a &strategy over the next several years to continue to focus very specifically on the SMB and developer communities,& Spruill told
TechCrunch that DigitalOcean will scale to $1 billion in revenue in the next five years, and it will become free cash flow profitable
(something the CEO also referred to, loosely, as profitability) in the next two.
All that and the company expects to reach a $300 million
annualized run rate inside the first half of 2020
How has it done all of that without raising new capital since it put roughly $200 million in debt onto its book back in 2016? A good
Let talk about DigitalOcean economics.
Economic efficiency
DigitalOcean has a pretty efficient go-to-market motion, which in human terms
means that it can attract new customers at relatively low costs
It does this, per the CEO, by attracting millions of folks (around four million, he said) to its website each month
Those turn into tens of thousands of new customers.
Because DigitalOcean is a self-serve SaaS business, folks can show up and get started
without hand-holding from sales
Sales cycles are expensive and slow
But, while allowing small companies to sign up on their own sounds attractive, companies that often lean on this acquisition method struggle
So, I asked Spruill about that, specifically digging into customer churn via graduation, the pace at which customers that joined
DigitalOcean as small companies left it for other players like Azure and AWS as they themselves grew (quote slightly condensed for
readability):
Like any self-serve, early-stage, or SMB-focused business, [the] first three to four months is critical for [customers]
But when you look at our customer base over time — we look at every cohort of the eight year history of our company — all of our cohorts
have grown each year, and our churn, which is what [your graduation rate] question is, do customers leave our platform, is de minimis after
customers have been on our platform for a year or more.
So it doesn&t appear that churn is a catastrophe at DigitalOcean, which gives it
what I&d call pretty attractive economics: Customers come in at relatively low customer acquisition costs, and with churn slipping very low
after an initial quarter or so, the company can extract gross margin from those customers for quite some time
What does it do with that cash? It reinvests it
Here how Spruill explained that process:
The high retention rates of the customers and the strong revenue growth enable cash flow to support
the growth and investment of the business and paying and supporting the debt
And when you think about the dilution, when you think about a business at our size and scale — the roughly $400 million of capital raised
is probably the right proxy, if you look at our peers and our size and stage of company development — most of them the vast majority of
In our case, only a quarter of the capital, a little over quarter the capital is equity
So we&re going to use the cash flow leverage of the business to drive enormous returns to the equity in terms of not taking on that
significant dilution, and still being able to grow the business in a in a responsible and exciting way.
The chorus sound effect you are
hearing in the background are the company early-stage investors rejoicing at DigitalOcean not selling more shares to grow, concentrating the
value-upside to existing shares
Shares that they own a lot of.
So let sum quickly: DigitalOcean is working to carve out an SMB and developer-focused cloud infra niche,
keeping its economics in a good place by using low-CAC, self-serve revenue generation
The margins from that are paying for the company development, and its overall economics are good enough to allow it to leverage debt to
invest in itself instead of equity
Overall, not what I expected to hear this morning, but that the fun part of news.
What in the future? Probably not an IPO any time soon
The company just raised more debt, money that it probably intends to use before debuting
The CEO told TechCrunch that &the IPO option for DigitalOcean is on the table,& going on to cite his company growth, growth rate, operating
margins, &soon-to-be free cash flow margins& and scale as allowing the upstart &to have the conversation that this is a company that could
go public.&
Next, adding DigitalOcean to the $100 million ARR club, and then I fancy a few more revenue milestones until an eventual S-1.
